| MOVADO GROUP INC Item 1A Risk Factors The following risk factors and the forward-looking statements contained in this Form 10-K should be read carefully in connection with evaluating Movado Group, Inc |
| These risks and uncertainties could cause actual results and events to differ materially from those anticipated |
| Additional risks which the Company does not presently consider material, or of which it is not currently aware, may also have an adverse impact on the business |
| Please also see "e Forward-Looking Statements "e on page 1 |
| The Company faces intense competition in the worldwide watch industry |
| The watch industry is highly competitive, and the Company competes globally with numerous manufacturers, importers and distributors, some of which are larger and have greater financial, distribution, advertising and marketing resources |
| The Companyapstas products compete on the basis of price, features, perceived desirability, reliability and perceived attractiveness |
| The Company also faces increased competition from internet-based retailers |
| The Companyapstas future results of operations may be adversely affected by these and other competitors |
| Maintaining favorable brand recognition is essential to the success of the Company, and failure to do so could materially and adversely affect the Companyapstas results of operations |
| Favorable brand recognition is an important factor to the future success of the Company |
| The Company sells its products under a variety of owned and licensed brands |
| Factors affecting brand recognition are often outside the Companyapstas control, and the Companyapstas efforts to create or enhance favorable brand recognition, such as advertising campaigns, product design and anticipation of fashion trends, may not have their desired effects |
| Additionally, the Company relies on its license partners to maintain favorable brand recognition of their respective parent brands, and the Company often has no control over the brand management efforts of its license partners |
| Finally, although the Companyapstas independent distributors are subject to contractual requirements to protect the Companyapstas brands, it may be difficult to monitor or enforce such requirements, particularly in foreign jurisdictions |
| Any decline in perceived favorable recognition of the Companyapstas owned or licensed brands could materially and adversely affect future results of operations and profitability |
| If the Company is unable to respond to changes in consumer demands and fashion trends in a timely manner, sales and profitability could be adversely affected |
| Fashion trends and consumer demands and tastes often shift quickly |
| The Company attempts to monitor these trends in order to adapt its product offerings to suit customer demand |
| There is a risk that the Company will not properly perceive changes in trends or tastes, which may result in the failure to adapt the Companyapstas products accordingly |
| In addition, new model designs are regularly introduced into the market for all brands to keep ahead of evolving fashion trends as well as to initiate new trends of their own |
| There is risk that the public may 11 not favor these new models or that the models may not be ready for sale until after the trend has passed |
| If the Company fails to respond to and keep up to date with fashion trends and consumer demands and tastes, its brand image, sales, profitability and results of operations could be materially and adversely affected |
| If the Company misjudges the demand for its products, high inventory levels could adversely affect future operating results and profitability |
| Consumer demand for the Companyapstas products can affect inventory levels |
| If consumer demand is lower than expected, inventory levels can rise causing a strain on operating cash flow |
| If the inventory cannot be sold through the Companyapstas wholesale or retail outlets, additional reserves or write-offs to future earnings could be necessary |
| Conversely, if consumer demand is higher than expected, insufficient inventory levels could result in unfulfilled customer orders, loss of revenue and an unfavorable impact on customer relationships |
| Failure to properly judge consumer demand and properly manage inventory could have a material, adverse effect on profitability and liquidity |
| An increase in product returns could negatively impact the Companyapstas operating results and profitability |
| The Company recognizes revenue as sales when merchandise is shipped and title transfers to the customer |
| The Company permits the return of damaged or defective products and accepts limited amounts of product returns in certain instances |
| Accordingly, the Company provides allowances for the estimated amounts of these returns at the time of revenue recognition based on historical experience |
| While such returns have historically been within managementapstas expectations and the provisions established, future return rates may differ from those experienced in the past |
| Any significant increase in product damages or defects and the resulting credit returns could have a material adverse effect on the Companyapstas operating results for the period or periods in which such returns materialize |
| The Companyapstas business relies on the use of independent parties to manufacture its products |
| Any loss of an independent manufacturer, or the Companyapstas inability to deliver quality goods in a timely manner, could have an adverse affect on customer relations, brand image, net sales and results of operations |
| The Company employs a flexible manufacturing model that relies primarily on independent manufacturers to meet shifts in marketplace demand |
| All product sources must achieve and maintain the Companyapstas high quality standards and specifications |
| The inability of a manufacturer to ship orders in a timely manner or to meet the Companyapstas high quality standards and specifications could cause the Company to miss committed delivery dates with customers, which could result in cancellation of the customers &apos orders |
| In addition, delays in delivery of satisfactory products could have a material, adverse effect on the Companyapstas profitability if the delays cause the Company to be unable to market certain products during the seasonal periods during which its sales are typically higher |
| See "e Risk Factors - The Companyapstas business is seasonal, with sales traditionally greater during certain holiday seasons, so events and circumstances that adversely affect holiday consumer spending will have a disproportionately adverse effect on the Companyapstas results of operations "e |
| A majority of the Swiss watch movements used in the manufacture of Movado, Ebel, Concord and ESQ watches are purchased from two suppliers |
| Additionally, the Company does not have long-term supply commitments with its manufacturers and thus competes for production facilities with other organizations, some of which are larger and have greater resources |
| 12 If the Company loses any of its license agreements, there may be significant loss of revenues and a negative effect on business |
| Many of the Companyapstas brands are subject to license agreements |
| License agreements give the Company the right to produce, market and distribute certain products under the brand names of ESQ, Coach, Tommy Hilfiger, HUGO BOSS, Juicy Couture and beginning in 2007, Lacoste |
| There are certain minimum royalty payments as well as other requirements associated with these agreements |
| Failure to meet any of these requirements could result in the loss of the license |
| Additionally, after the term of the license agreement has concluded, the licensor may decide not to renew with the Company |
| Any loss of one or more of the Companyapstas licenses could result in loss of future revenues which could adversely affect its financial condition |
| Changes in the sales mix of the Companyapstas products could impact gross profit margins |
| The individual brands that are sold by the Company are sold at a wide range of price points and yield a variety of gross profit margins |
| Thus, the mix of sales by brand can have an impact on the gross profit margins of the Company |
| If the Companyapstas sales mix shifts unfavorably toward brands with lower gross profit margins than the Companyapstas historical consolidated gross profit margin or if the mix of business changes significantly in the Movado Boutiques, it could have an adverse affect on the results of operations |
| The Companyapstas business is seasonal, with sales traditionally greater during certain holiday seasons, so events and circumstances that adversely affect holiday consumer spending will have a disproportionately adverse effect on the companyapstas results of operations |
| The Companyapstas sales are seasonal by nature |
| The Companyapstas US domestic sales are traditionally greater during the Christmas and holiday season |
| Internationally, major selling seasons center on significant local holidays that occur in late winter or early spring |
| The amount of net sales and operating income generated during these seasons depends upon the general level of retail sales during the Christmas and holiday season, as well as economic conditions and other factors beyond the Companyapstas control |
| If events or circumstances were to occur that negatively impact consumer spending during such holiday seasons, it could have a material, adverse effect on the Companyapstas sales, profitability and results of operations |
| If the economy faces a recessionary period, purchases of the Company products may be adversely affected |
| Some of the Companyapstas products fall into higher price categories that are considered discretionary luxury items |
| Consumer purchases of discretionary luxury items can change due to many economic and global factors |
| Declining confidence in the US or international economies, rising interest rates and taxation issues could adversely affect the level of available discretionary income for consumers to spend |
| In addition, events such as war, terrorism, natural disasters or outbreaks or disease could further dampen consumer spending on luxury items |
| If any of these events should occur, the Company could suffer from losses of future sales |
| If the Company is unable to successfully implement its growth strategies or manage its growing business, its future operating results could suffer |
| The Company is constantly expanding its business through acquisitions, license agreements, joint ventures and new initiatives such as the growing Movado Boutique business |
| There is risk involved with each of these |
| Acquisitions and new license agreements require the Company to ensure that new brands will successfully complement the other brands in its portfolio |
| The Company assumes the risk that the new brand will not be viewed by the public as favorably as its other brands |
| In addition, the integration of an acquired company or licensed brand into the Companyapstas existing business can strain the Companyapstas current infrastructure with the 13 additional work required and there can be no assurance that the integration of acquisitions or licensed brands will be successful or that acquisitions or licensed brands will generate sales increases |
| The Company needs to ensure it has the proper manpower and systems in place to allow for successful assimilation of new businesses |
| The risk involved in growing the Movado Boutique business is that the Company will not be able to successfully implement its business model |
| In addition, the costs associated with leasehold improvements to current Boutiques and the costs associated with opening new Boutiques could have a material adverse effect on the Companyapstas financial condition and results of operations |
| The inability to successfully implement its growth strategies could adversely affect the Companyapstas future financial condition and results of operations |
| The loss or infringement of trademarks of the Company could have an adverse effect on future results of operations |
| The Company believes that its trademarks are vital to the competitiveness and success of the business and has taken the appropriate actions to establish and protect them |
| There can be no assurance, however, that such actions will be adequate to prevent imitation of the Companyapstas products or infringement of its trademarks or that others will not challenge the Companyapstas rights in, or its ownership of certain trademarks, or that such trademarks will be successfully defended |
| In addition, the laws of some foreign countries, including some of which the Company sells its products, may not protect the rights to these trademarks to the same extent as do the laws of the United States, which could make it more difficult to successfully defend such challenges in these areas |
| The inability to obtain or maintain rights in the Companyapstas trademarks could have an adverse effect on brand image and future results of operations |
| Pricing fluctuations of commodities could adversely affect the Companyapstas ability to produce product at favorable prices |
| Some of the Companyapstas higher-end watch offerings are made with materials such as diamonds, precious metals and gold |
| The Companyapstas proprietary jewelry is manufactured with silver, gold and platinum, semi-precious and precious stones, and diamonds |
| A significant change in the prices of these commodities could adversely affect the Companyapstas business by: - reducing gross profit margins; - forcing an increase in suggested retail prices; which could lead to - decreasing consumer demand; which could lead to - higher inventory levels |
| All of the above could adversely affect the Companyapstas future cash flow and results of operations |
| The Companyapstas business is subject to foreign currency exchange rate risk |
| The majority of the Companyapstas inventory purchases are denominated in Swiss francs |
| The Company operates under a hedging program which utilizes forward exchange contracts and purchased foreign currency options to mitigate foreign currency risk |
| If these hedge instruments are unsuccessful at minimizing the risk or are deemed ineffective, any fluctuation of the Swiss franc exchange rate could impact the future results of operations |
| Changes in currency exchange rates may also affect relative prices at which the Company and its foreign competitors sell products in the same market |
| A portion of the Companyapstas net sales are derived from international subsidiaries and are denominated in Canadian dollars, Swiss francs, Euros, Hong Kong dollars, Singapore dollars, Japanese yen and British pounds |
| Future revenues derived in these currencies could be affected by currency fluctuations |
| 14 The Grinberg family owns a majority of the voting power of the Companyapstas stock |
| Each share of common stock of the Company is entitled to one vote per share while each share of class A common stock of the Company is entitled to ten votes per share |
| While the members of the Grinberg family do not own a majority of the Companyapstas outstanding common stock, by their significant holdings of class A common stock they control a majority of the voting power represented by all outstanding shares of both classes of stock |
| Consequently, the Grinberg family is in a position to significantly influence any matters that are brought to a vote of the shareholders including, but not limited to, the election of the board of directors and approving any action requiring the approval of shareholders, including any amendments to the Companyapstas certificate of incorporation, mergers or sales of all or substantially all of the Companyapstas assets |
| This concentration of ownership also may delay, defer or even prevent a change in control of the Company and make some transactions more difficult or impossible without the support of the Grinberg family |
| These transactions might include proxy contests, tender offers, mergers or other purchases of common stock that could give stockholders the opportunity to realize a premium over the then-prevailing market price for shares of the Companyapstas common stock |
| The stock price of the Company could fluctuate and possibly decline due to changes in revenue, operating results and cash flow |
| The revenue, results of operations and cash flow of the Company can be affected by several factors, some of which are not controllable by the Company |
| These factors may include, but are not limited to, the following: - the ability to anticipate consumer demands and fashion trends; - increased competition within the watch industry; - a downturn in the local or global economy that could affect the purchase of consumer discretionary goods; - material fluctuations in foreign exchange rates or commodities; - the ability to prevent the loss of or infringement upon the Companyapstas trademarks; - the loss of any of the Companyapstas license agreements; - the financial stability of the Companyapstas customers; - the success of the Companyapstas growth strategies; and - disease, natural disasters, acts of terrorism or war or other similar global events |
| The factors above, as well as any other factors discussed in section 1A of this Form 10-K, could cause a decline in revenues or increased expenses, both of which could have an adverse effect on the results of operations |
| If the Companyapstas earnings failed to meet the expectations of the public in any given period, the Companyapstas stock price could fluctuate and possibly decline |
| If the Company were to lose its relationship with any of its key customers or distributors or any of such customers or distributors were to experience financial difficulties, there may be a significant loss of revenue and operating results |
| The Companyapstas customer base covers a wide range of distribution including national jewelry store chains such as Helzberg Diamonds Corp, Sterling, Inc |
| and Zale Corporation, department stores such as Macyapstas, Neiman Marcus and Saks Fifth Avenue, independent regional jewelers, licensed partner retail stores and a network of distributors in many countries throughout the world |
| The Company does not have long term purchase contracts with its customers, nor does it have a significant backlog of unfilled orders |
| Customer purchasing decisions 15 could vary with each selling season |
| A material change in the Companyapstas customers &apos purchasing decisions could have an adverse effect on its revenue and operating results |
| The Company extends credit to its customers based on an evaluation of each customerapstas financial condition usually without requiring collateral |
| Should any of the Companyapstas larger customers experience financial difficulties, it could result in the Companyapstas curtailing doing business with them or an increase in its exposure related to its accounts receivable |
| The inability to collect on these receivables could have an adverse effect on the Companyapstas financial results |
| If the Company were to lose key members of management or be unable to attract and retain the talent required for the business, operating results could suffer |
| The Companyapstas ability to execute key operating initiatives as well as to deliver product and marketing concepts appealing to target consumers depends largely on the efforts and abilities of key executives and senior managementapstas competencies |
| The unexpected loss of one or more of these individuals could have an adverse effect on the future business |
| The Company cannot guarantee that it will be able to attract and retain the talent and skills needed in the future |
| If the Company were unable to maintain existing space or to lease new space for Boutiques in prime mall locations or be unable to complete construction on a timely basis, it may result in adversely affecting the Companyapstas ability to achieve profitable results in the Boutique business |
| The Companyapstas strategy to create a Movado lifestyle image and build retail presence with product assortments that complement successful wholesale watch distribution is a key element in the Companyapstas future business plans |
| Movado Boutiques are strategically located in the top malls throughout the United States |
| If the Company could not maintain and secure locations in the prime malls it could jeopardize the operations of the stores and business plans for the future |
| Additionally, if the Company could not complete construction in new stores within the planned timeframes, cost overruns and lost revenue could adversely affect the profitability of the Boutique segment |
| If the Company could not secure financing and credit with favorable terms, the Company could suffer high borrowing costs which could impact financial results |
| The Company has been able to secure financing and credit facilities with very favorable terms due to the Companyapstas financial stability and good relationships with its lending partners |
| If conditions were to change where the Company was unable to comply with its key covenants in its lending agreements or where relationships were to deteriorate it could increase the borrowing rates and have an adverse effect on financial results |
| The Company relies heavily on its activities outside of the United States |
| Many factors affecting business activities outside the United States could result in an adverse impact on the business |
| The Company produces all of its watches and a portion of its proprietary jewelry outside the United States and primarily in Europe and Asia |
| The Company also generates approximately 21prca of its revenue through international sources |
| Factors that could affect the business activity vary by region and market and generally include without limitation: - changes in social, political and/or economic conditions that could disrupt the trade activity in the countries where the Companyapstas manufacturers, suppliers and customers are located; - the imposition of additional duties, taxes and other charges on imports and exports; 16 - changes in foreign laws and regulations; - the adoption or expansion of trade sanctions; and - a significant change in currency valuation in specific countries or markets |
| The occurrence or consequences of any of these risks could affect the Companyapstas ability to operate in the affected regions |